Tuesday, March 14, 2017

On Those Lower Insurance Prices After 2020 in (T)Rumpcare

The one thing Republican politicians like about the recent Congressional Budget Office (CBO) assessment of their replacement plan for the Affordable Care Act (ACA) is that the CBO estimates a drop in the price of individual insurance after 2020.*

The premia will rise until then, because of the predicted exit of many young-and-healthy individuals from the insurance market. Under the ACA, the individual mandate demanded that they, too, should buy coverage, but under the (T)Rumpcare that mandate is removed. The loss of many young, low-risk individuals will raise the average premia for those who remain in the individual market.

So what changes after 2020, to cause a drop in the price of individual insurance?

Is it the greater price competition in the wonderful "free" markets, as conservatives usually argue? This

House Speaker Paul Ryan pressed that point in a series of appearances
Monday night, suggesting that the budget office had found that the House
bill would increase choice and competition and lead to lower prices.
The Senate majority leader, Mitch McConnell, issued a statement
saying, “The Congressional Budget Office agrees that the American
Health Care Act will ultimately lower premiums and increase access to
care.”

Starting in 2020, the increase in average premiums from repealing the
individual mandate penalties would be more than offset by the
combination of several factors that would decrease those premiums:
grants to states from the Patient and State Stability Fund (which CBO
and JCT expect to largely be used by states to limit the costs to
insurers of enrollees with very high claims); the elimination of the
requirement for insurers to offer plans covering certain percentages of
the cost of covered benefits; and a younger mix of enrollees. By 2026,
average premiums for single policyholders in the nongroup market under
the legislation would be roughly 10 percent lower than under current
law, CBO and JCT estimate.

That quote gives three reasons for the decrease in average premia. Let's look at them in a reverse order:

First, the CBO expects the enrollees to be younger, on average. Now why would that be the case? It's not because the US demographics are starting to tilt that way. Rather, it will be a direct consequence of many older people exiting the insurance market, because they can no longer afford the premia. Note that the tax credits (which would replace the income-tied subsidies in the ACA) are twice as large for a sixty-year old than a twenty-year old but the premium that can be charged to the former are allowed to be five times as large as the premium charged to the latter. This combination can be devastating for poorer older individuals:

The C.B.O. estimates that the price an average 64-year-old earning
$26,500 would need to pay after using a subsidy would increase from
$1,700 under Obamacare to $14,600 under the Republican plan.

Note that the exit of the older, poorer and sicker individuals from the market is not because of greater consumer choice or greater competition or greater efficiency in the insurance marketplace. It's a direct consequence of increasing the pool of the uninsured, and in one sense the price of insurance to that group is extremely high, so high that they are not buying any coverage.

The second reason for the CBO to predict lower premia after 2020 isn't about consumer choice, greater competition or greater efficiency, either, unless we interpret those concepts in an unusual way.

That reason is that insurers no longer need to offer plans which cover a certain percentage of the cost of the covered benefits, which means that consumers get less coverage for any given level of premia.
Here's the 60,000 dollar question for you: Has the price of insurance dropped if the bundle you are buying costs less, but also has a lot less insurance in it? How can you tell?**

Thus, it's possible that these particular grants to the states would no longer help keeping the premia down in, say, 2027.

So what are we to conclude from all this?

That none of the predicted decreases in the price of individual insurance are caused by greater price competition which then produces greater efficiency. Instead, average premia might drop because many higher-risk older individuals become unemployed (while desperately counting days to the start of Medicare coverage), because the contents of some insurance bundles are watered down, and because of some price subsidies for high-risk and/or poorer individuals.

By 2026, the budget office projected, “premiums in the nongroup market
would be 20 percent to 25 percent lower for a 21-year-old and 8 percent
to 10 percent lower for a 40-year-old — but 20 percent to 25 percent
higher for a 64-year-old.”

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